Previous Quarterly Editions
Expropriation Risk: 48 53 53 52 ▼Political Violence Risk:49 49 67 57 ▼Terrorism Risk:40 42 39 37 ▼Exchange Transfer and Trade Sanction Risk: 45 55 55 54 ►Sovereign Default Risk:57 57 66 47 ▼
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Since 1961, at the height of the Cold War, Brazil’s foreign policy establishment, in particular its influential Ministry of Foreign Affairs and professional diplomatic corps, established and implemented an ‘independent foreign policy’. In practical terms, this policy aims at increasing Brazilian influence in regional and global politics through the democratisation of international regimes, economic integration with the world economy, and the fostering of Brazilian ‘soft power’ influence.
During the Cold War, the independent foreign policy allowed Brazil to establish and nurture political and economic relations with both the U.S. and the Soviet Union. After the Cold War, the same logic applied with regards to Western and Eastern ‘great powers’, namely the U.S., China, and Russia.
Despite this balancing act by the country’s foreign policy establishment, Brazilian society considers itself as part of the West, sharing most of its values with the U.S. and Europe, including liberal democracy, human rights, and free market economics.
Furthermore, over the years, foreign policy became a more relevant issue in domestic politics, with increasingly ideological overtones. In this context, China has been particularly penalised by Brazilian society as an untrustworthy partner, despite there being no relevant concrete evidence of Chinese action against Brazil. The United States enjoys the opposite situation, being considered a role model for the country.
The main source of foreign countries’ influence in Brazil is economic. China is Brazil’s largest trading partner while the European Union is second. The U.S. is the third, and Russia is particularly relevant as a source of inputs such as fertilisers to Brazilian agriculture. In addition, the first three players are also major investors in Brazil. While the U.S. and European Union invest heavily in the Brazilian manufacturing and services sectors, China is a substantial investor in the energy sector. Despite their relevance, Brazil does not have free trade agreements with any of these trade partners.
In the past decade, Brazil leaned towards closer defence cooperation with the U.S., signing a bilateral agreement on defence cooperation in 2010 and being designated a non-NATO ally in 2019. Brazil’s key weapons modernisation programmes are in partnership with France (specifically diesel and nuclear-powered submarines) and Switzerland (combat aircraft). At the same time, Brazilian oil, iron ore, and agricultural commodities’ exporters increased their dependence on the Chinese market.
Despite its closer relationship with the U.S., Brazil did not impose sanctions against Russia nor tried to isolate the country diplomatically after its February 2022 invasion of Ukraine. Brazil continues to engage Russian and Chinese officials at the highest level through the BRICS grouping (Brazil, Russia, India, China and South Africa) and high-level bilateral mechanisms chaired by the Brazil’s vice-president.
It is expected the next Brazilian president will continue to implement the independent foreign policy by trying to increase Brazilian influence in regional and global politics and working with both sides in the West-East geopolitical dispute.
The risk of expropriation is very low due to a strong legal framework in place and Brazil’s commitment to an open investment policy, with national treatment of foreign investors guaranteed by the constitution. However, contract enforcement continues to be an issue due to time-consuming and costly judicial enforcement proceedings.
Populist policies tend to be more pronounced on social programmes, including tax benefits and conditional cash transfers to the poor, rather than on issues of property.
Despite former President Jair Bolsonaro’s clashes with other federal powers, intermittent threats to democracy, and political radicalisation, there have been few significant episodes of political violence in Brazil.
As of this writing, Bolsonaro has yet to admit defeat in the October 30 run-off election, and his continuing silence is taken by many supporters as an indication that he is planning to resist leaving office. Thousands of Bolsonaro supporters have demonstrated outside military barracks in major cities, calling for military intervention to prevent President-elect Luiz Inacio Lula da Silva from taking up his post.
The armed forces continue to voice their obedience to the constitution and there is no signal of threat from the military leadership. That said, continuing protests point to high levels of polarisation and violence risks that will test Lula's government.
Brazil continues to avoid direct experiences of terrorism. Nonetheless, it has improved its legal framework during the past decade to criminalise terrorism and terrorist financing, as well as to identify and freeze terrorist assets. Brazil also has extensive counterterrorism cooperation with other countries.
Organized crime continues to be a major source of insecurity. Brazil’s two largest criminal groups, the First Capital Command (or PCC) and the Red Command (or CV), dominate drug trafficking directed both to domestic consumption and foreign sales. The country is not a major drug producer, but has a large market and is a major transit route of cocaine distribution to Europe. In addition, local-level paramilitary groups are related to criminal groups, specifically in Rio de Janeiro.
Land property-related crimes continue to be an important source of insecurity, in particular in the countryside and in states in the country’s agricultural frontier in the North and Midwest regions.
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Brazil faces no multilateral or unilateral sanctions of any kind, nor state-sponsored boycotts. There is a risk of threat of sanctions, particularly on trade, if the country’s commitment to the protection of the Amazon biome deteriorates.
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Brazil eliminated its government’s combined federal, state, and local, public deficit in 2021 after eight consecutive years of deficits. However, this was mainly the result of state and local governments’ increase in tax revenue due to COVID-19, and Russia/Ukraine crisis-related high inflation. There is an expectation the country will not have a new deficit in 2022 but could see a new one in 2023. The debt-to-GDP ratio has declined from nearly 90% to below 80%.
The country is also expected to reach a peak in its benchmark Selic interest rate at around its current level (13.75%) as the central bank continues its effort to keep inflation under control. There was an expectation the central bank would begin reducing the rate by the end of the second quarter, but the Russia/Ukraine crisis put further pressure on inflation through oil and fertiliser prices, two key inputs of the Brazilian economy.
While the fiscal and monetary policies scenario is not favourable in the short term, a sovereign default remains very unlikely. Presidential hopefuls are vowing to pursue a new round of domestic reforms in 2023, hoping to increase economic growth and reduce poverty while preserving fiscal and monetary policy fundamentals.
